LESSONS FROM DOWN UNDER ON HOW NOT TO IMPROVE HOUSING AFFORDABILITY?
Housing state policy focus post-2000 aimed at addressing housing affordability has increasingly moved toward enabling private sector land and housing supply and can be characterised as reactive rather than proactive, short-term rather than sustained, and piecemeal as distinct from integrated. Our housing outcomes are amongst the poorest in the OECD — especially for the poorest in our society. To depict the last 25 years of housing policy as ‘subdividing society’ is not a metaphysical notion — it is a physical urban reality. If the objective was to improve affordability — it’s failed. If the objective was to enable large-scale subdivision, record house prices and widening social inequality — it’s been a stonking success.
Policy introduced during the Fifth National Government term (2008-2017) includes the Housing Accords and Special Housing Areas Act 2013 (now repealed) to spot zone land for development in high growth urban areas, piecemeal fiscal and monetary policy measures aimed at cooling the property market and improving affordability, including the ‘Bright-Line Test’, maximum loan-to-valuation ratios (LVRs) and the National Policy Statement on Urban Development Capacity 2016 (since replaced). All have failed to cool the property market or improve housing affordability. The Sixth Labour Government term (2017-2023) ushered in new policy in the form of KiwiBuild, the Resource Management (Enabling Housing Supply and Other Matters) Amendment Act 2021 and Medium Density Residential Standards (MDRS), other changes to planning legislation, and the National Policy Statement on Urban Development 2020 aimed at boosting density in urban areas. All have similarly failed to stabilise the market or improve housing affordability.
The Sixth National Government term (2023-) has accompanied new policy in the form of the ‘Fast Track Approvals Bill’ (FTAB) in early 2024 and ‘Going for Housing Growth’ strategy. Housing Minister Chris Bishop said on 4 July 2024 that housing strategy would in effect “flood the market with opportunities for development and over time drive down land prices and the cost of housing”. The policy was designed to require certain local authorities to zone land to cater for 30 years of demand. Quite how such demand will be accurately calculated given the multitude of contributing factors is yet to be explained. The policy erroneously assumes that, following implementation by local authorities, there will be a surge of available land for development and that increased housing supply and housing affordability will somehow follow. However, there is no evidence the policy will improve housing outcomes here — whether affordability, security of tenure, quality, or market stability. It is highly unlikely to reduce the cost of land or, more particularly, the cost of land development.
More likely outcomes from a flood of available land zoned for development and implied lower land prices, are property owners land-banking, or land development itself being unviable. Further, the policy won’t address the cost of building, it doesn't address skilled labour availability or cost, it doesn't address sector supply chain issues such as competition and new materials availability and it doesn't facilitate innovation in building systems. All need to be fixed if we want to achieve enduring improvements in our housing outcomes, especially affordability. The last thing we need is a lot more unaffordable homes, and especially if this coincides with sub-optimal, disjointed urban development outcomes and exacerbated demand on our already under-capacity and under-funded infrastructure. State policy is conflating housing affordability issues with political party ideology, in this instance ‘growth’ — instead of focusing on improved outcomes.
We also need to think differently when it comes to taxation policy. Clearer capital gains tax rules have made it harder for those speculating in property but haven’t improved market stability, affordability or quality. Do we need a more enabling taxation regime? For example, tax rebates for larger-scale housing initiatives and a capital gains tax on all housing that incentivises long-term ownership and market stability, as in Switzerland. There, if you sell within a short time of buying any capital gain (less the value of improvements made) is taxed at a very high rate. If you sell after say 20 years you pay tax on any net capital gains at a much lower rate. It’s a capital gains regime on all housing that promotes long-term ownership and market stability.
One thing for certain is that we shouldn’t look to the RBNZ, or short-term monetary policy, for a long-term solution to our housing issues. Lowering the official cash rate (OCR) only makes property more attractive for investors. Increasing the OCR makes it harder for first home buyers trying to get into the market, and more risky for those who have just got into the market. Macro prudential measures such as stricter LVRs only make it harder for first home buyers to get into property ownership. Former RBNZ Governor Adrian Orr said using interest rates to target house prices is not within RBNZ’s mandate and monetary policy is best used to manage overall consumer price inflation stability, rather than being used to target a specific asset price. Innovation in low-cost capital mechanisms to fund housing and related infrastructure will however be required and that implies pan-political agreement which represents a significant challenge.
Rules forcing Councils to allow increased housing density within the existing urban boundary and to expand land availability outside the existing urban boundary will offer a perfect environment for those with access to land and capital to profit from speculation and development. It is highly unlikely to improve housing affordability, quality and spatial efficiency but very likely to create poor planning outcomes. What will the impact be to our character suburbs and natural environments? What impact will ad hoc development have on our already beleaguered infrastructure? Who pays for the cost of capacity increases or new infrastructure? The frenzied verbal whipping of the Resource Management Act 1991 (RMA) and replacement with new legislation could potentially create a worse consenting bottleneck through the transition phase — as planners, developers, architects, lawyers etc. grapple with understanding the new legislation. Such was the case during transition from the Town & Country Planning Act to the much more enabling RMA.
While the policy focus remains on land subdivision for building detached or low-density owner-occupier housing — often informed by econometric modelling — improved housing access, affordability and quality will likely remain illusive. The MDRS is a good example of the disconnect between economic paradigms (or political ideology) and market reality. Econometric modelling indicated an additional 53,683 dwellings could result in Auckland from the MDRS by tripling the allowable housing density on a typical lot. However, that is simply the result of an equation in a spreadsheet based on the modeller’s assumptions. The best econometric modelling can’t make owners subdivide or re-develop their property — especially the very large cohort in Auckland constrained by cross lease, unit title, and leasehold land complexities. There’s also an entire housing value chain that’s left out of the econometric model — land assembly, capital and financing structures, design and engineering processes, resource planning and local authority consenting processes, construction systems, materials and labour logistics, provision and funding of the necessary infrastructure, right through to the end sale or tenanting.
Those expecting greenfield land supply to deliver affordable housing need to understand the commercial vectors. A typical large-scale land or building development can involve up to 30 or so technical specialists that need to be identified, appointed, briefed and managed through the various stages of the project life-cycle. It is hugely time-consuming and can easily take up to five years just to achieve initial stage title releases — even given planning and building consent fast tracking — and up to 20 years for project completion. Any land development has to work financially, optimise economic and seasonal cycles, and satisfy end user requirements. Regardless of raw land availability, property owners or investors aren’t going to deliver cheaper sections if they can’t develop land below a certain cost (because of construction or raw materials inputs), or the project doesn’t achieve the required return above the weighted cost of capital (equity/debt), or they can simply ask and get a higher price. Because large-scale land development can take such a long time to become cashflow positive — it is highly risky. As such, corporate developers and investors (both listed and unlisted) here in New Zealand typically require a minimum pre-tax Internal Rate of Return (IRR) over the life of the project in the order of ~20% — which implies an even bigger financial margin (expressed as EBIT/costs).
Regardless of the potential tripling of density on a residential lot, a fast-track consenting process by-passing community input, a state directive for local authorities to cater for 30 years of demand (whatever that means), or the most elegant econometric modelling, the MDRS, ‘Fast Track’ legislation and ‘Going for Housing Growth’ initiatives seem unlikely to roll out as planned.
Some fresh thinking on housing policy is overdue and the conversation should be widened beyond economic and political dogma, construction/materials supply companies, banks, investors, and others with a financial interest in the traditional value chain. It may be more insightful to hear from sector actors less focused on financial gain and economic growth and more concerned with improving local housing affordability, quality and efficiency. In particular, not-for-profit housing entities, occupiers, local councils, architects, social demographers, ecologists, academics with an educational or research interest in housing policy, technical delivery and cultural history, and impacted communities.
© Níall Mayson